The idea that providers might combine CI and IP in a single product appears to have merit. But w...
The idea that providers might combine CI and IP in a single product appears to have merit. But wouldn't such a product also need to offer life cover? Unless the client already had sufficient life cover it would seem pointless to exclude it particularly if you thought that such a product might be attractive as mortgage protection – perhaps its most obvious application.
This would mean that we could have a three way product – life, CI and IP, but at what levels? If this were to be attractive to the IFA community then sum assureds in excess of £100,000 would be needed, against which the provider would be exposed to three areas of claim.
And does this mean three separate sum assureds; an amount for IP, followed by an amount on CI followed by an amount on death or are we talking about a single pot?
For underwriting alone, we need to be talking about a single pot which is triggered partially or wholly by a number of events.
The problems will come with the size of the application forms, the current confusion in the CI markets and the almost total antipathy towards IP products from most distributors.
It might be impossible to apply for, difficult to underwrite and a claims nightmare which could not be explained by most distributors. It appears attractive but would it create a monster?
Market views
Graham Newitt, Legal & General
CI was the success story of the 1990s, with rapid growth leading to over one million new policies being sold in 2003. However, we are now in a period of change with increasing costs leading to advisers considering alternatives. The introduction of reviewable premiums has had some impact but the debate has started about the need for new products and how they should be structured.
Meanwhile, IP has never captured the imagination in the same way and sales have quietly continued with around 100,000 policies sold last year.
Legal & General recently asked 400 IFAs for their views on how the CI market should develop. A clear message emerged that many IFAs still want an affordable guaranteed product that provides customers with a lump sum payment to aid recovery. While other concepts had some appeal, a major shift in product design was not foremost in the respondents' minds.
Introducing a new product style will therefore require time to establish adviser confidence. A hybrid product would help ensure broader overall cover for the customer, filling the gap between CI and other chronic conditions and providing an ongoing income to customers who were unable to return to the same job longer term.
The challenge would be to find a simple way of providing the cover that was easy for customers to understand and at a price they found affordable. If successful, such a plan would be a welcome addition to the protection market.
Diane Saunders, Diane Saunders Financial Adviser
I do not need to be persuaded that IP is a good plan for everyone who depends upon ongoing, increasing income to maintain their standard of living.
Last year was a bad year for CI; conditions were redefined, costs rose and as IP has never been a best seller, insurers' marketing departments need to find other ways to sell protection.
However, I fail to see how a hybrid product would be a welcome addition since hybrid means a cross, a mix, and a fusion. Anything that blurs the issues for insurance companies may give rise to a dispute if a claim arises.
As an adviser, one of the questions I am frequently asked is which is the best plan: CI or IP? I advise CI if that is the solution to my client's protection needs and advise IP for everyone who needs it.
The important thing to remember is that CI, IP and redundancy and mortgage protection are different and need different consideration. It is not cost that is the criteria, but value. How appropriate is the plan and how likely is it that a client's future claims would be paid?
The only reason hybrid products are ever launched is because insurance companies want to sell more policies. Protection is not easy to sell because of the 'it will never happen to me' mentality and we need to find ways of making it more palatable. But why do insurance companies think that offering one form instead of two would be a benefit for our clients?
Shelley Robertson, Skandia
CI cover insures for a specific event, irrespective of the ability to work and IP insures a loss of income through ill health, irrespective of whether the condition is permanent or critical. From one perspective, it's always better that a client has some protection rather than none. But they are both very different products and it is already confusing for consumers to understand what they have bought.
For example, a CI product paying an income instead of a lump sum could be considered as a hybrid. The upside is that it is normally cheaper than the lump sum version, but there are several downsides. For example, a lump sum can be used to pay off the mortgage – the income may only cover the monthly interest payments plus a little extra – meaning that the debt isn't paid off that quickly, costing much more in the long term.
Also, any private healthcare costs may cost more than one regular payment and may need to be financed by say, a loan or credit card. Of course, paying off the loan could be done using the CI payments, but as the debt would not be cleared at once (as using a lump sum would have done), this means paying interest on top – again costing more in the long run.
If the client had an IP as well, the income from the CI policy may reduce the IP benefits payable if there is a cap on the total maximum income permitted.
So, if IFAs are thinking of selling any hybrid products, they need to trade off the initial costs against the practicalities of using the benefits.
